Accounts Receivable: What Small Businesses Need to Know

By Marci Martin, Writer July 28, 2015 02:16 pm EST

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Accounts receivable are the lifeblood of a business's cash flow. Sometimes referred to as A/R, "accounts receivable" is the accounting term used to refer to the money that the business should receive from its customers for the goods or services it provided.

Your business's accounts receivable are an important part of calculating your profitability, and provide the clearest indicator of the business's income. They are considered an asset, as they represent money coming into the company. To determine profitability, add up all of your assets, including accounts receivable, and subtract your total accounts payable, or liabilities, which are what you owe to suppliers and vendors. If the number is positive, the company is profitable. If it's negative, then decisions must be made regarding how to increase the assets or reduce the liabilities.

Why track accounts receivable?

If you do not keep track of accounts receivable, you may forget to bill certain customers or will not know if you've been paid. You may end up providing your product for free and negatively impact your ability to be profitable. The longer it takes to send the invoice, the less likely it will be that your payment will be sent. Keeping track of accounts receivable is also a great way to have documentation supporting proof of income at tax time.

Accounts receivable are best managed on a consistent and routine basis. In retail, each transaction is paid for immediately. With other industries, customers apply for a credit line, and orders are placed against the credit line. The customer is provided an invoice and payment terms with the shipped product, payable at a later date. Regardless of your system, ensuring payment is crucial. Here are five tips to make sure your business stays on top of its accounts receivables:

Communicate. In a 2013 Transworld Business article, Jason Stine, business development manager for collection services company CRF Solutions, advised regular and prompt communication with clients. Stay on top of transactions; more nonpayment errors develop in the first 60 days after delivery because of insufficient or incomplete customer contact, Stine said.

Create a solid internal process. Determine the process for performing accounts receivable, and stick to it. Pick a day of the week to create, print and mail invoices. Choose another day to print an aged accounts receivable report and contact customers who are beyond their payment term window. As your small business grows, you may need to split these tasks among different people to stay on top of all the accounts.

Confirm receipt of invoices. Many companies have had success in contacting the client a week after the invoice was sent, in order to confirm receipt. Things do get lost in the mail or accidentally deleted in an email inbox. A quick inquiry about receipt of the bill also provides the chance to ask for feedback on the product provided, demonstrating your excellent customer service skills as well.

Extend credit with moderate terms. With today's technological advances, companies can receive payment before shipping an order or starting a service. With service-based companies and high-cost goods, however, that may not always be possible. In those cases, have the client apply for a credit line. You will be able to evaluate their payment ability and set a credit limit you're comfortable with. It also provides an opportunity to be sure both parties are clear on the terms of payment and what happens if the account goes delinquent.

Document everything. Documentation of accounts receivable helps your bookkeeper with weekly or monthly inputs for financial statements and your accountant at tax time. From first contact, keep notes on the order, conversations and agreed-upon terms. In a worst-case scenario, that documentation will also be important should you have to pursue payment through a collection agency or court.

The funds collected through your accounts-receivable process is the food that fuels the actions of your company. Inconsistent and spotty attention to the task can starve a company's growth, while a steady and smooth process results in a well-fed machine capable of achieving all of its goals.

Additional resources

Further information on handling accounts receivable can be found in the following articles:

With an Associate's Degree in Business Management and nearly twenty years in senior management positions, Marci brings a real life perspective to her articles about business and leadership. She began freelancing in 2012 and became a contributing writer for Purch in 2015.